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Debunking trickle down economics
The real reasons for the collapse of the Middle Class explained
Ever since the 1980's the Republican party has incorporated the hypothesis of trickle down economics into the very heart of it's fiscal policy initiatives. It consists of the belief that cutting taxes for corporations and the wealthy will allow them to invest more into the economy, create jobs and improve conditions for everyone.
But how does this belief measure up to economic trends? One quick way to measure this is to compare levels of income inequality with the corresponding top marginal tax rates. If tax cuts on the rich benefited all of society equally than we should be seeing a very small change in the level of inequality. Instead we see this:
Image provided courtesy of the film: Inequality for all
As the graph clearly shows decreases in the top marginal tax rate come with enormous increases in the percentage of American wealth owned by the top one percent. So what effect does this have on the remainder of Americans. Haven't their wages increased at all?
Actually, quite the opposite has occurred. The typical male worker in 1978 made 44,308 US Dollars (adjusting for inflation) per year. As of 2010 the income of the typical male worker has decreased to a meager
$ 33,751/yr, a shocking statistic when you consider that the average wage of a top one percent earner has increased to $ 1,101,089. This being the case, why hasn't any of that enormous wealth "trickled down" to the majority of Americans?
The answer to this dilemma lies in the rarely acknowledged fact that the true spenders and job creators of every economy are the members of the middle class. If this idea seems revolutionary to you consider the following. What are the similarities in financial habits between the ultra rich and the middle class? Do they not both have the same basic necessities; 3 meals a day, a car, a home... While it is true that the one percent may spend their money on more luxurious versions of the same products (Lamborghini vs Mazda) they are eventually left with large amounts of disposable income. In an increasingly globalized world in which it is much cheaper to purchase goods in foreign markets and then import them into the US, this income is unlikely to be invested directly into the American economy.
On the other hand when the marginal tax rate is increased, the government can afford to invest directly in it's population by funding social welfare programs and and providing financial aid to make college more affordable. This in turn creates a highly skilled workforce which can now afford to spend more of it's income in and way that directly benefits the American economy by eating out and buying more expensive amenities than they could previously afford. To meet this increased demand companies are forced to hire more employees in the service industry which in turn reduces unemployment.
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